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The Obama administration would end fees paid to banks that provide loans to students, a move that would effectively end private sector student lending and save the taxpayer $47.5 billion over the next decade. All student loans would be administered through the Education Department's direct lending program, under the proposal included in the administration's budget framework released Thursday.

No idea what this would actually mean for availability of loans this year, since the budget proposal is for the fiscal year which begins Oct. 1, 2009.
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26 Feb 2009, 10:57

The Department of Education already lends "directly" to students via select universities, and the terms offered to students on those loans are significantly better than the federal loans made by Sallie Mae or Citibank et al. Just as an example, the interest rate on a GradPLUS loan made under the Direct Loan Program is 7.9% as compared to 8.5% for a regular GradPLUS loan disbursed by a private lender.

Sallie Mae and Citibank only make real money on disbursing federally backed student loans because of government subsidies. Interest rates on federal student loans are fixed, and defaults are high (the student loans are however federally guaranteed), so under President Obama's new proposal Sallie Mae, Citi and co. may not want to continue participating in the federal loan program, and choose only to service the loans.

This however, will not affect the availability of private student loans (such as CitiAssist or Sallie Mae Signature Loans), which are not subsidized or guaranteed by the government. Just as it is currently, in theory and depending on your credit, possible to get a (variable rate) private student loan that is significantly cheaper than any federal student loan, you can still choose to borrow from a private lender instead of the government. The private lenders are free to decide which borrowers to lend to, and the borrowers are free to decide which lenders to borrow from. The market for private student loans will still be there!

In any case, the federal student loan market has always been a de facto "monopoly" because the government has implicitly backed all Stafford/Perkins/PLUS loans against default. The new proposal is not going to inherently change this fact. The government's involvement is precisely why a freshman in college with practically no credit history is able to borrow several thousand dollars under the auspices of the Stafford and Perkins loan programs. Without government backing in the student loan market, younger undergraduates and unemployed workers seeking to retrain, for instance, would possibly never qualify for reasonably priced private student loans.

So a government "monopoly" is not always a bad thing. I use the word "monopoly" because Jerz feared the new Obama proposal would lead to precisely this.